Download This PDF is a selection from an out-of-print volume from... Bureau of Economic Research

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Foreign Trade Regimes and Economic Development: South Korea
Volume Author/Editor: Charles R. Frank, Jr., Kwang Suk Kim
and Larry E. Westphal
Volume Publisher: NBER
Volume ISBN: 0-87014-507-X
Volume URL: http://www.nber.org/books/fran75-1
Publication Date: 1975
Chapter Title: An Overview
Chapter Author: Charles R. Frank Jr., Kwang Suk Kim, Larry E. Westphal
Chapter URL: http://www.nber.org/chapters/c4072
Chapter pages in book: (p. 219 - 244)
world
cy, as-
Chapter 11
tariffs
t mealabor
An Overview
ficients
;Sumed
el that
ratios
1968
—
ratios
None-
;idered
ins are
ataon
s
The
billion
1965
estate
input
results
ediate
lied a
these
table
1
g
'ciates
corn-
milar.
In the preceding chapters we have examined the history and the complex details of foreign exchange and trade policy and have discussed quantitative
measures of the effects of these policies on efficiency and growth. In this
chapter we evaluate the influence of South Korea's economic growth on employment and income distribution. We also assess the main factors at work
in the rapid growth of the South Korean economy since the early l960s, particularly the role of foreign exchange and trade policy, by drawing as much as
possible on our previous analysis. Then after summarizing the lessons of the
two liberalization episodes, we shall caution against hasty generalizations
from the South Korean experience.
EFFECTS OF GROWTH ON EMPLOYMENT
The rapid growth of the Korean economy was documented in Chapter 2. Before discussing the causes of this performance, however, it is appropriate to
analyze its effects on employment and income distribution.
In fact, the rapid growth of the 1960s was accompanied by a steady decline in the rate of unemployment, particularly in the nonfarm sector (Table
11—1). In addition, the nonfarm proportion of the population was steadily
rising, exceeding 50 percent by 1970. At the same time, farm population de-
clined not only relatively but also absolutely from a peak of 16.1 million
in 1967 to a low of 14.4 million in 1970.
Unemployment declined because job opportunities in the nonagricultural
219
220
AN OVERVIEW
TABLE 11—1
Farm and Nonfarm Population and Unemployment, 1957 to 1972
•
Farm
Nonfarm
Population
Population
13.6
13.8
9.4
9.9
(millions)
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
14.1
14.6
14.5
15.1
15.3
15.6
15.8
15.8
16.1
15.9
15.6
14.4
14.7
14.7
(millions)
10.2
10.5
11.4
11.5
12.0
12.4
12.8
13.5
13.8
14.5
15.4
17.1
17.4
18.0
Nonfarm
Population
as Percent
of Total
Population
40.8
41.8
41.8
42.0
43.9
43.3
44.1
44.5
44.8
46.0
46.1
47.8
49.7
54.3
54.2
55.1
Unemployment Rate
(percent)
5.9
6.2
5.8
Nonfarni
Household
Unemployment Rate
(percent)
7.5
7.9
8.3
8.2
7.7
na
na
na
na
na
na
16.4
14.4
7.1
12.8
7.4
6.2
5.1
4.8
4.5
4.5
4.5
13.5
11.1
8.9
7.8
7.4
7.4
7.5
NOTE: na—not available. Since the coverage and method of labor force survey
changed in 1963, the labor force statistics available for the period prior to 1963 were not
consistent with those for the later period. All data other than total population given in
this table for 1960—62 were therefore estimated by linking the old survey data with the
new data (two different survey results were available for 1963).
SouRcE: Bank of Korea, Economic Stotistics Ycorbook, 1973, p. 6; Economic Planning Board, Major Economic Indicaors, July 1973, p. 96; Economic Planning Board,
Korea Statistical Yearbook, various issues prior to 1964.
sectors rapidly increased. Table [1—2 shows that the rate of growth of populatiori dropped steadily throughout the 1960s. From a high of 3.2 percent per
annum in 1961, it declined to 1.8 percent by 1970. The growth of the total
labor force, however, showed a fairly high rate of increase from 1960 to
1972, although there were ups and downs reflecting moderate changes in
participation rates. The farm labor force has declined since 1965, decreasing
at a rate of 2.1 percent in 1971.
Job opportunities expanded rapidly, particularly in the manufacturing
sector, the leading sector of the economy (Table 11—3). At the same time,
growth in manufacturing stimulated rapid increases in output and employment in other nonagricultural sectors.
a
I
—
1.8
2.1
1.9
1.8
1.8
2.6
2.4
2.2
2.0
3.2
2.9
2.9
24.70
25.50
26.23
26.99
27.68
28.33
28.96
29.54
30.17
30.74
31.30
31.85
32.42
TABLE 11—2
18.25
18.98
19.72
15.09
15.50
15.94
16.37
16.76
17.17
17.64
14.85
14.16
14.50
Population
14 Years
and Older
(millions)
2.7
2.8
2.7
2,4
2.5
2.7
3,5
4.0
3.9
1.6
—
2.4
2.4
Growth
Rate of
Population
14 Years
and Older
(percent)
10.20
10.54
11.06
8.34
8.45
8.86
9.07
9.30
9.65
9.88
8.15
7.74
7.94
Total
Labor
Force
(millions)
4.9
3.2
3.3
2.4
3.8
4.9
2.4
2.5
1.3
2.6
2.7
2.3
Growth
Rate of
Total
Labor
Force
(percent)
5.41
4.93
4.85
5.06
5.09
5.17
5.23
5.28
5.20
5.26
5.26
5.20
5.09
Farm
Labor
Force
(millions)
6.3
—1.1
—2.1
0.0
0.1
—1.5
1.2
1.6
1.2
4.4
0.6
—1.6
—
Growth
Rate of
Farm
Labor
Force
(percent)
I
jj
4.10
4.39
4.63
5.00
5.45
5.65
3.10
3.25
3.28
3.63
3.79
3.11
2.82
Nonfarm
Labor
Force
(millions)
0-
3.7
8.0
9.0
8.2
7.1
5.5
5.0
0.9
10.7
4.4
—
10.3
—0.3
Growth
Rate of
Nonfarm
Labor
Force
(percent)
SOURCE: Economic Planning Board, Annual Report on the Economically Active Population, 1972; Major Economic Indicators, July 1973,
p. 96; and Korea Statistical Yearbook, various issues.
1972
1971
1964
1965
1966
1967
1968
1969
1970
1961
1962
1963
1960
lation
(percent)
Popu—
Total
Popu-
lation
(millions)
Growth
Rate
of Total
I
I
Population and Labor Force Growth, 1960 to 1972
0
•
20,104
14,561
17,349
2,030
2,170
2,350
2,330
2,610
2,780
3,180
3,880
4,600
5,420
6,640
8,400
11,270
125.6
26.4
28.6
30.9
32.9
39.7
51.4
58.4
65.4
72.5
80.6
88.7
100.0
112.3
26.1
25.3
15,449
16,006
14,561
7,778
8,577
8,902
8,147
8,447
8,450
8,010
7,549
7,877
8,287
9,159
10,422
12,706
3.6
6.1
14.6
21.9
4.3
5.2
10.5
13.8
—5.8
—5.2
8.5
3.7
0
—
10.3
3.8
1,021
1,170
1,232
1,284
1,336
1,445
610
637
772
833
511
409
413
456
438
446
of
Price
Index Earnings Deflated
sands
Earnings
of
(1970 (1970
= 100) prices) (percent) persons)
Rate of
Growth
Employ-5
in
14.6
5.3
4.2
4.1
8.2
22.6
14.5
19.3
4.4
21.2
7.9
1.8
10.5
—4.0
0.9
—
in Manufacturing
(percent)
Rate
1970
762.79
560.01
659.21
249.87
306.77
389.67
473.03
94.65
103.25
112.78
122.00
125.79
142.34
166.96
177.86
213.35
prices)
constant
Value
15.7
22.8
27.0
21.4
18.4
17.7
17.1
20.0
13.2
17.3
6.5
3.1
9.2
8.2
9.1
—
2,580
2,825
2,974
3,396
3,547
3,906
4,354
4,589
4,829
5,190
5,213
1,946
1,938
2,149
2,547
2,086
11.5
5.4
5.2
7.5
0.4
10.1
45
9.5
5.3
14.2
—6.7
—0.4
10.9
18.5
1.3
—
agricultural
tural
Manufac- Employ- Employturing
ment
ment
in
Rate of
Growth
of Non-
1970
tural
Value
Added
of
Growth
of
2,078.36
2,262.70
1,669.01
1,864.67
796.26
827.40
927.05
1,051.27
1,218.23
1,437.04
728.81
564.29
589.03
635.80
663.15
662.28
11.5
8.9
16.1
11.7
9.3
3.9
12.0
13.4
15.9
18.0
—0.1
10_i
7.9
4.3
—
4.4
prices) (percent)
of won
constant
Nonagricul-
o00n
.——
—-
-----
0
estimated by linking the old survey data with the new data (two different survey results were available for 1963).
" 0-
a. Since the coverage and method of labor force survey changed in 1963, the labor forte statistics available for the period prior to 1963
were not consistent with those for the later period. All data other than total population given in this table for 1960—62 were therefore
SOURCE: Bank of Korea. Economic Statistics Yearbook, various issues; Economic Planning Board, Korea Statistical Yearbook, various issues.
1971
1972
1962
1963
1964
1965
1966
1967
1968
1969
1970
1961
1957
1958
1959
1960
in Manufacturing
(won)
Monthly
TABLE 11-3
Employment, Earnings, and Output in Nonagricultural Sectors, 1957 to 1972
GROWTH AND INCOME DISTRIBUTION
223
3
3)
.9
3)
I_ i_
0.. u
.9
6)60
.33 06
I-
3
— (3
33
—
333)
-
(.3
33
33
•
3)
•
0
33
.>
3)
o
3-.
.2
.0
...
6)6)
06)3.3
•0 .33
0—
0
3-)
6)
03333
3.)
3)
.33
-.33
Growth in employment opportunities in manufacturing was rapid mainly
because of large increases in investment and output which created a demand
for workers. The growth in output was achieved through labor-intensive methods. In many other countries rapid growth in manufacturing output is accompanied by a rapid increase in labor productivity because of a trend toward
more capital-intensive methods. In Korea, by contrast, manufacturing employment grew very rapidly between 1957 and 1967, at 9.6 percent per annum, while labor productivity lagged behind at an annual rate of increase of
about 2.6 percent. From 1967 to 1972, however, productivity increased much
more, at an average of 11.9 percent per annum. These changes were a function
of variations in the growth in real wages. In 1959, real monthly earnings of
manufacturing workers reached a peak of 8,902 won in terms of 1970 prices
(Table 11—3). By 1964 real monthly earnings had declined to 7,549 won
but they began to rise again in 1965. After surpassing the 1959 level in 1967,
they registered spectacular growth until 1970. This increase continued, though
at a somewhat slower rate, until 1972. By 1971, the 1964 level of earnings
had doubled. The rapid growth in real wages since 1967 was the result'of increasing tightness in the labor market and shortages of skilled labor. In contrast to the earlier period 1957 to 1967, it was correlated with much more
rapid increases in labor productivity and slower growth in employment. Between 1967 and 1972, the growth rate of employment dropped to 7.2 percent
a year.
Even though manufacturing employment grew less rapidly after 1967, the
rate of growth from 1957 to 1972 averaged 8.8 percent per annum. Meanwhile, total nonagricultural employment increased by 6.3 percent per annum.
One reason for this good performance was the government's willingness to
allow wage rates to be set by competitive forces. Labor was not thoroughly
unionized nor did the government press for minimum wages. Nonagricultural
wages more accurately reflected the opportunity cost of labor in the traditional agricultural sector than they do in the typical less developed country
where government policies combined with union pressures keep wages in the
modern sector artificially high. Furthermore, by permitting the South Korean
price structure to remain largely consistent with world prices, the government
provided incentives to concentrate production in labor-intensive exports and
home goods and to import capital-intensive goods rather than to substitute
for imports. Labor absorption was rapid, at least until the very late 1960s
when labor shortages began to appear and wages started to rise very rapidly.
:33
4) 0
GROWTH AND INCOME DISTRIBUTION
4)
I..
.—
Though it is difficult to determine the effect of South Korea's rapid growth on
income distribution, bits and pieces of evidence suggest that the distribution
A
224
AN OVERVIEW
has been quite even. In fact surveys reveal that among Korean households
expenditure on consumption tends to be more nearly equal than it is elsewhere in the world and that from 1964 to 1970 this distribution seemed to
than t
very r
ties art
improve.'
Farm incomes are a notable case in point, thanks to a
reform that
was begun under the U.S. military occupation and completed by the Korean
government in 1949. The net result seems to be a remarkably even division
of land and income. Nor is there much disparity between farm and nonfarm
income as the following table shows:2
Average
Monthly
Wage for
Farm
Workers
(won)
vast PC
ing cia
lives
Average
Monthly Wage
for
Manufacturing
Production
Workers
(won)
entr epi
FAC
The S
effecti
restrai
2,610
3,880
8,400
1,978
3,657
7,383
1961
1964
1968
1971
wages.
tions ii
13,432
relatjv
17,349
turn 01
dema
1965.
Though manufacturing wages have generally been higher than farm wages,
the cost of living is probably lower in the country where farm workers often
till their own vegetable gardens. Of course most farm work is seasonal, but
even so Korea appears to be free of the large differences between rural and
urban income typical of other less developed countries.
the p
thoug
age in
margi
This impression is reinforced by data on average farm household income.1
Farm income and manufacturing wages can be compared as follows:4
1964
1968
1971
Average Total
Farm Household
Income (won)
Farm Household
Income per
Worker (won)
Annual
Manufacturing
Wage Income
(won)
125,692
178,959
356,382
56,618
87,297
179,990
46,560
100,800
208,128
return'
robor
from
was
fi rms
would,•
and or
andf
tairi
Total farm income, including income in kind, far exceeds annual wage income
of production workers in manufacturing, but farm income per worker was
somewhat greater than nonfarm income per worker in 1964, a good agricultural year. in 1968 and 1971 farm income per worker was probably a bit less
j
a
site su
level 0
alloca
binati
FACTORS PROMOTING RAPID GROWTH
than the average manufacturing wage. Even if these calculations are only
sehold
very rough, they lead to the same conclusion that rural-urban income dispari-
med t 0
-m that
Korean
onfarm
•
225
•
ties are small.
Wages in nonagricultural sectors have tended to follow manufacturing
wages. Market forces set the rates and because there are no great imperfections in the market disparities between sectors do not arise. In Korea where
vast poois of the unemployed and the underemployed are unknown, the working class, both urban and rural, which forms the great bulk of the population,
lives on an income that is nearly uniform. If data on income distribution were
available they would probably show that even the conspicuous wealth of a few
entrepreneurs in Seoul is not enough to reverse the apparent pattern.
FACTORS PROMOTING RAPID GROWTH
•
wages,
often
tal, but
ral and
•
income
• er was
•
igriculbit less
The South Korean economy has not suffered from any constant deficiency in
effective demand. Except for 1958—61 and 1964 when effective demand was
restrained by either deflationary monetary and fiscal policy or by political
turmoil, investment demand since the Korean War has tended to be excessive
relative to the supply of savings, and inflation has been acute. The rate of return on investment has tended to be high as may be inferred from the large
demand for loanable funds that persisted despite very high interest rates after
1965. Borrowing at these high rates increased continually throughout most of
the period from 1963 to 1971 and finder's fees for loans were common. Although many bank loans were subsidized in one way or another and the average interest paid on them was probably only about two-thirds the official rate,
marginal borrowers had to pay the high rates which indicates that the rate of
return on marginal investments was at least as great. This inference is corroborated by direct measurements. For example, Gilbert Brown has estimated
from national accounts data that the average rate of return on new investment
was 20 to 30 percent. He also cites direct estimates based on data from eleven
firms that in late 1965 the average rate of return was about 28
The South Korean economy has exhibited the characteristics that theory
would predict for an underdeveloped country where labor is abundant and
capital scarce—a high rate of return on capital, vigorous investment demand,
and meager investable resources. The main constraints on growth are savings
and foreign exchange. The factors that foster rapid growth are those that sustam
and complement heavy investment demand, those that increase the requisite supply of savings, those that earn the foreign exchange needed when the
level of effective demand is high, and, finally, those that foster efficient resource
allocation, evidenced by a very low incremental capital-output ratio. The cornbination of these four factors produces a result that tends to be self-sustaining;
•
4
226
AN OVERVIEW
for rapid growth stimulates demand in nearly all sectors of the economy. As
investment proves ever more profitable, an accelerator effect comes into play.
Growth generates still more growth and in the consequent enthusiasm, predictable setbacks turn out to be temporary as entrepreneurs become convinced
that the resumption of growth is inevitable.
In addition to these factors, which in varying degrees influence the growth
possjb
tate. j
done.
relatjo
that h
promo
coopei
charac
of most developing countries, there are some that are peculiar to Korea.
Though they have not yet been analyzed in any detail, they ought to be men-
tioned for they contributed to a favorable environment for investors and
helped sustain brisk investment demand. For example, the work force in
Korea is highly educated by the standards of most less developed countries.
In 1970 the adult literacy rate was 88 percent,6 and the proportion of primaryschool-age children attending primary school was 97 percent.7A highly educated work force, it might be argued, was more easily trained and was a factor
in the high levels of efficiency and productivity achieved,
South Korea also has an abundant supply of entrepreneurial and managerial expertise. Although very few Koreans became managers under the
Japanese colonial regime, it did not take them long to develop a managerial
class after the liberation. A large proportion of them immigrated from North
Korea, but many of the most successful entrepreneurs are of southern origin.
No significant number of managers and entrepreneurs are foreign. Foreign direct investment has been exceedingly small, only about 7.4 percent of total
foreign investments and loans between 1959 and 1971.8
Another advantage favoring Korea's economic development was the political stability that prevailed during the period of most rapid growth. Park
Chun Hee has made economic develo ment the s mbol of his government's
His efforts have been aided by Korea's cultural homogeneity. Disputes over language and among ethnic groups have not been important in
develo
finance
for sh(
ported
go Ufl(
analyz(
conclur
SUPP,
The su
l960s
inflatio
W
cent of
South Korean politics,
South Korean development has also benefited from the weakness of the
labor movement which so far has produced few powerful, organized unions.
In the Korean system of industrial organization, which in many ways is sinu-
•
•
lar to the Japanese, employees tend to remain with one firm for life, loyal to
their paternalistic employers. Because the labor force is docile and unaccustomed to collective bargaining, upward pressure on wages is negligible except
when manpower is scarce. Stable real wage rates helped to keep profits high
and to stimulate investment demand.
Finally, ties with Japan encouraged growth. Although their colonial regime was extremely unpopular, the Japanese did manage to build a strong
industrial base in Korea before the war. Much of it was destroyed during the
war, and the subsequent departure of Japanese managers was temporarily
crippling. Nevertheless, the Japanese had shown that industrialization was
of
tance p
and the41
sible
In
ratio
an
out the c
declined
plentiful
per dolla
-
SUPPLY OF SAVINGS
As
to play.
m, pre-
flViflced
growth
Korea.
•
)e menand
force in
)Ufltrjes.
)rimary_
•
ily edua factor
mana-
der the
nagerial
1 North
origin.
eign di-
of total
he poli1.
227
possible in Korea and they had provided an example for the Koreans to imitate. Imitation seemed all the more sensible since the Japanese, who had an
economy of their own to rebuild, appeared to know how the job should be
done. Accordingly, the Koreans adopted the technology, the approach to labor
relations, the expansionary psychology, and many of the government policies
that had worked so well for the Japanese. As a result, the emphasis on export
promotion, the system of trade and foreign exchange controls, and the close
cooperation between the public and private sectors that are reputed to be
characteristic of Japan alone are typical of South Korea as well.
Investment demand, however voracious, cannot by itself sustain economic
development. It must be matched by a rate of savings that is high enough to
finance the investments desired. Ample foreign exchange is also important,
for shortages can restrict realized investment by curtailing the supply of imported raw materials and capital goods. And if inefficiencies in production
go uncorrected, an economy can suffer from progressive debility. Having
analyzed these issues in the preceding chapters, we shall now present our
conclusions.
SUPPLY OF SAVINGS
The supply of savings, both domestic and foreign, was abundant during the
1960s but not large enough to satisfy total investment demand because of an
inflationary gap that has persisted throughout most of the period since 1963.
Park
Iment's
ty. Dis-
tant in
of the
unions.
is simi-
oyal to
Iaccusexcept
ts high
iial re-
strong
ing the
)fl was
Foreign Savings.
We noted in Chapter 7 that foreign savings have remained about 10 percent of GNP since 1960 (Table 7—4), while over the years their nature has
changed. In the post-Korean War period, most foreign savings took the form
of foreign aid grants from the United Nations and from U.S. bilateral assistance programs. In the early 1960s, foreign aid loans began to replace grants
and then, from 1966 onwards, commercial loans from a variety of countries
became the dominant source.
In Chapter 7, we estimated that foreign savings might have been responsible for about 4 percent of total growth, assuming the average capital-output
ratio between 1960 and 1970 was about 2.5. That is, what appeared to be
an annual growth rate of 10 percent might have been closer to 6 percent without the contribution of foreign savings. By the early 1970s, foreign savings had
declined in importance for two reasons. Domestic savings were becoming more
plentiful and because the capital-output ratio has tended to increase, growth
per dollar of imported capital had apparently deteriorated.
228
AN OVERVIEW
Large importation of foreign capital led to heavy debt service by 1970.
Since 1971 the burden has become less onerous.
Foreign commercial borrowing probably was excessive in the late l960s.
A divergence between social opportunity costs and the private costs of foreign capital made foreign borrowing more attractive than it should have been.
The government originally encouraged all forms of foreign borrowing, but
had to discourage short-term transactions after 1970 under an IMF standby
Y
agreement.
1
There is little evidence that reliance on foreign aid was inordinate. Because aid receipts were usually grants, especially in the early 1960s, they
cost Korea little while yielding high rates of return. It is true that many of
the grants may have discouraged domestic savings, but at the time, South
Korea was desperately poor and needed the additional resources both for
1
1
U
U
I'
consumption and investment.
Domestic Private Savings.
Although foreign capital sparked the growth of the South Korean economy, domestic savings eventually sustained it. In 1960 domestic savings
financed only about 20 percent of total gross investment. By 1972 this proportion had risen to about 75 percent (see Table 7—4).
Business savings (in constant 1970 prices) grew rather slowly after the
Korean War, but since 1957, they increased quite rapidly, at an average rate
of 1 1.8 percent per year between 1957 and 1972 (Table 11—4). As we
showed in Chapter 8, business savings are moderately responsive to interest
rates. The elasticity of business savings is 0.34 although the interest rate is
still statistically a significant determinant of business savings (see equation
(8—15) in Chapter 8). A more significant factor in business savings, however,
is nonagricultural value added. As value added and profits increase, business
savings tend to increase (there are no reliable profit data; nonagricultural
value added might serve as a proxy). The elasticity of business savings with
respect to nonagricultural value added was 0.67 between 1960 and 1970.
As Table 11—4 shows, household savings have been very erratic, being
very sensitive to both the rate of inflation and the interest rate on time deposits (see equation (8—14) in Chapter 8). Household savings were substantial while prices were stable during the late 1950s and even greater in
the latter '60s after the interest rate reform of September 1965 had raised
the rates. During periods of low interest rates and high inflation, like the
early 1960s, household savings were very low and at times quite negative.
At 1.82, household savings were much more elastic than business sayings from 1955 to 1970 and they were also quite elastic with respect to the
rate of inflation,
P
P
I
1
a
g
Governmj
I
Govj
tant in
1970, gOt'
15.7
reforms. 1.
percent p
Govi
revenues
revenues
229
SUPPLY OF SAVINGS
TABLE 11-4
Sources of Domestic Savings, 1953 to 1972
(billions of won, constant 1970 prices)
)y 1970.
C 1960s.
of for—
ye been.
ting, but
standby
late. Be-
;o,
they
many of
—
e, South
both for
•
Government
Business
Savings
39.30
44.13
40.32
40.56
45.38
52.58
62.06
1962
1963
1964
1965
1966
1967
1968
1969
19.47
4.67
10.65
52.47
41.95
39.43
36.08
54.63
66.33
67.03
66.41
71.50
94.38
103.48
128.83
174.90
183.98
1970
1971
1972
Year
Savings
1953
1954
1955
1956
1957
1958
1959
1960
1961
an econ-
savings
this proafter the
rage rate
As we
I
•t
interest
rate is
equation
lowever,
business
icultural
ngs with
970.
•c, being
time desubSeater in
d raised
like the
ttive.
tess say-
to the
I
Household
Savings
—15.09
36.93
30.40
8.77
12.05
22.42
21.16
0.55
5.18
0.59
Total
43.68
85.73
81.37
101.80
99.38
114.43
119.30
115.09
140.20
59.91
68.69
88.29
96.77
96.07
119.24
128.57
145.39
—17.50
—18.02
22.62
80.65
83.37
86.24
115.34
236.24
312.70
357.59
422.95
474.21
206.43
182.85
92.67
481.95
190.45
191.82
132.69
241.24
49.36
99.73
431.63
473.66
161.81
174.89
155.91
145.68
149.55
NOTE: The estimates of savings include savings from transfers from
abroad. Household savings include errors and omissions and exclude
grain inventory changes.
SOURCE: Table 8—hA.
Government Savings.
Government savings and business savings have been about equally important in total savings since the Korean War (Table 11—4). Between 1953 and
1970, government savings grew quite rapidly, at an average annual rate of
15.7 percent. The growth was most substantial, however, after the 1964 tax
reforms. From 1964 to 1970 government savings increased at a rate of 20.6
percent per annum.
Government savings multiplied both because of rapid growth in tax
revenues and because of a slow rate of increase in current expenditures. Tax
revenues rose sharply during the Korean War recovery, from about 5 percent
230
AN OVERVIEW
T
of GNP in 1953 to more than 10 percent in 1959. By 1964, however, they
had declined to 7.3 percent. After the 1964 tax reforms, revenues reached a
peak of more than 16 percent of GNP in 1971 before declining slightly in
1972.'° In addition, government monopolies contributed rapidly growing
net surpluses which constituted almost 11 percent of central government
revenues in 1972.h1
Government current expenditures grew less rapidly than total govern.
merit revenues from 1962 to 1970, when current expenditures declined from
78 percent of current revenues to about 62 percent. Between 1970 and 1972,
current expenditures rose more rapidly than revenues. Much of the government nonrecurrent expenditures went to directly productive assets. Between
1963 and 1971, about 14 percent of total government loans and investments
went into mining and manufacturing, 39 percent into electricity, transport,
and communications, and 25 percent into agriculture, forestry, and fisheries)2
The remainder was invested in housing, education, and other services. Some
government savings were channeled to the private sector through governmentfinanced loan funds of development banking institutions such as the Korean
Development Bank and the Medium Industry Bank. In 1963, government
funds accounted for more than one-half of all outstanding loans of the banking sector. After the interest rate reform of 1965, the commercial banks greatly
expanded their loan portfolios, but even in 1970, government funds accounted
for more than one-quarter of total outstanding loans by banking iflstitutiofll.13
In 1972, about one-sixth of total government savings was allocated to capital
transfers of this type.14
SUPPLY OF FOREIGN EXCHANGE
One of the most striking features of the South Korean economy has been the
rapid growth of foreign exchange earnings. Foreign exchange receipts on current account grew at an average annual rate of 26.2 percent between 1963 and
1972 (Table 115).
Year
1961
1963
1964
i
1965
1966
1967
1968
1969
1970
1971
1972
Economic
a. Th
ducted th
million ac
and total
1961.
between
one-third
after 196k
South Kol
Invisible Earnings,
In the early 1960s, a high proportion of total foreign exchange receipts
were invisibles and derived directly from the presence of a large contingent of
UN (mostly U.S.) forces stationed in South Korea. Sales of local currency to
UN forces, military procurement, and provision of electricity, transport, water,
and other public utilities to UN installations accounted for almost one-half of,
I
came
forces inc
receipts g
dined, an
total forei
ment and
Korea.
231
SUPPLY OF FOREIGN EXCHANGE
TABLE 11-5
ver, they
eached a
lightly in
Foreign Exchange Receipts on Current Account, 1961 to 1972
(millions of dollars)
growing
vernment
governned from
nd 1972,
govern-
Between
—
•
transport,
isheries,'
Some
iernmeflt-
e Korean
•
Year
Total
1961
166.2
179.0
177.2
212.2
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Receipts from UN Forces
and from U.S. Procurement
Foreign Exchange Receipts"
298.0
486.8
695.4
889.4
1,102.0
1,306.7
1,523.4
2,159.2
Merchandise
Exports
Other
Current
Receipts
Total
42.6
56.7
85.2
123.6
122.3
91.8
97.1
125.8
79.7
115.1
172.2
248.4
320.2
464.9
604.9
816.0
1,036.8
1,580.0
238.4
375.2
424.5
497.1
490.7
486.6
579.2
86.1
58.3
63.7
74.0
100.9
147.1
177.6
207.0
190.8
173.5
192.8
Won
Sales
35.7
47.2
30.5
26.4
34.1
30.4
35.3
49.3
43.1
52.3
61.3
97.6
Pro-
curement Utilities
38.4
34.1
22.1
33.2
35.7
65.5
106.7
122.3
155.7
131.4
106.0
90.6
5.6
4.8
5.7
4.1
4.2
5.0
5.1
6.0
8.2
7.1
6.2
4.6
SOURCE: Bank of Korea, Economic Statistics Yearbook, 1973, p. 216; 1970, p. 282;
Economic Planning Board, Korea Statistical Yearbook, 1972, p. 406.
a. These figures understate total receipts because they only include transactions con-
t
ducted through banking channels. For example. in 1971 export receipts totaled $1,132
million according to customs clearance.
the
:s on cur-
1963 and
and total invisibles about three-quarters of, all foreign exchange earnings in
1961. Receipts from UN forces and other invisibles were relatively stagnant
between 1961 and 1965, however, so that by 1965 they accounted for about
one-third of total earnings. The escalation of the U.S.' effort in Viet Nam
after 1965 brought more troops to South Korea and an increase in military
procurement, both for troops in South Korea and for those in Viet Nam.
e receipts
•tingent
of
irrency to
)rt, water,
of,
South Korean goods were exported to Viet Nam under military procurement
contracts beginning in 1967 and a number of Korean construction firms became involved in military projects in South Viet Nam. Receipts from UN
forces increased rapidly between 1965 and 1969, but other foreign exchange
receipts grew even more quickly. After 1969, receipts from UN forces declined, and by 1971, only 36 percent of invisible earnings and 11 percent of
total foreign exchange receipts could be attributed to U.S. military procurement and other earnings generated by the presence of UN forces in South
Korea.
232
AN OVERVIEW
Exports.
The major reason for the very rapid growth in foreign exchange earnings
was the growth of exports. As we indicated in Chapter 6 exports in the l950s
were negligible and followed an erratic pattern, ranging from a high of $40
million in 1953 to a low of $17 million in 1958 (Table 6—1). After 1958 exports began a pattern of uninterrupted growth, exceeding the 1953 level by
1961. From 1962 until 1973, the growth rate of exports averaged 44.8 percent per annum every year and reached a high of 98 percent in 1973. Exports
increased from less than one-third of total current foreign exchange receipts,
about one-eighth of the total value of imports in 1962, to three-quarters of
all current foreign exchange receipts and almost 65 percent of the value of
imports in 1972.
In Chapter 6, we noted that exports of South Korea are relatively import
intensive so that the net foreign exchange earnings are substantially less than
the gross earnings. Even if a correction is made for this fact, the ratio of ex-
ports to GNP and the rate of growth of exports are exceptionally high by
international standards.
The reasons for the rapid growth of exports are somewhat elusive. Actually exports grew rapidly from a very low level in 1958. But prior to 1964,
our econometric analysis in Chapter 6 indicated that peither exchange rates
nor export subsidies could explain the growth of exports. In 1964, the exchange rate was unified and the sensitivity of exports to exchange rates and
subsidies increased markedly. The estimated elasticity of exports with respect
to the purchasing-power-parity official exchange rate was 6.16 and the estimated elasticity with respect to subsidies is 4.69. These very high elasticities,
however, are suspect because of the limited time period and the few degrees
of freedom. Nevertheless, recent experience confirms the impression that
Korean exports are highly sensitive to the exchange rate (the latest year for
which data were used in the econometric work reported in chapters 6 and 8
was 1970). The purchasing-power-parity exchange rate adjusted for realignments in Japanese and European currency revaluations against the dollar,
increased about 10 percent in 1972 and another 10 percent in 1973 (Table
5—7). This was the result of a float of the won in the first half of 1972, the
dollar devaluation in early 1972 and 1973, and the float of other currencies
against the dollar. Exports increased 52 percent in 1972 and 98 percent in
1973.
The increased sensitivity of exports to exchange rates and subsidies may
be due to the unification of exchange rates and the relative stability of the
purchasing-power-parity effective exchange rate from 1964 to 1970. The
elimination of multiple rates removes the uncertainties and administrative costs
to the private entrepreneur in dealing with an unstable, multiple rate system.
Tb
Ifl term
importa
tudes a
and p01
Firms
by tax
are set
are SUCC
and othe
Wit
will Few
of expa
cannot
if lie run
Special ti
gs
The
Otfi
export ea
$373 mill
By 1964,
since the
however,
exceeded
duced the
large as ca
DEMAN1
Gold and f4
compared
total Impo&
end-of-the
of the annu
the year of
Dunn1.
took place.
much less ii
233
DEMAND FOR FOREIGN EXCHANGE
ige earnings
n the l9SOs
high of $40
er 1958 cx53 level by
44.8 per-
•
•
173. Exports
ige receipts,
-quarters of
the value of
.ively import
.lly less than
•
ratio of exally high by
elusive. Acior to 1964,
change rates
)64, the cxge rates and
with respect
md the esti-
i elasticities,
few degrees
'ression that
test year for
ters 6 and 8
for realignthe dollar,
1973 (Table
of 1972, the
currencies
8 percent in
ubsidies may
Lbility of the
1970. The
strative costs
rate system.
p
The rapid growth of South Korea's exports cannot be explained simply
in terms of those incentives subject to quantitative measurement. Other very
important factors, perhaps even more important, are the government's attitudes and methods of operating. For example, government officials use moral
and political suasion to urge private entrepreneurs to meet export targets.
Firms who are successful in promoting exports receive favorable treatment
by tax officials, an important incentive in a country where effective tax rates
are set more by administrative procedures than by law. Entrepreneurs who
are successful exporters are publicly acclaimed and feted by the President
and other high officials.
With an atmosphere in which businessmen are certain that government
will reward efforts to export, it is relatively easy to take the substantial risks
of expanding production and capacity for export markets. A businessman
cannot only expect tangible rewards for export performance, but knows that
if he runs into financial difficulties, the government will provide some form of
special treatment to help him out of his troubles.
a
Earnings on Capital Account.
The other major sources of foreign exchange were on capital account.
Official grant aid plus net capital inflows were many times greater than
export earnings for some time after the Korean War. Capital imports reached
$373 million or almost twenty times the level of exports in 1957 (Table 11—6).
By 1964, export earnings exceeded capital account earnings for the first time
since the Korean War. The growth of foreign borrowing in the latter 1960s,
however, exceeded the growth of exports so that until 1969, capital imports
exceeded export earnings. In 1970, restrictions on capital imports again reduced them below the level of exports. By 1972, exports were three times as
large as capital imports.
DEMAND FOR FOREIGN EXCHANGE
Gold and foreign exchange holdings of South Korea have been relatively ample
compared with total imports. In 1960 they were more than 50 percent of the
total import bill. Despite the rapid growth of the economy from 1963 to 1972,
end-of-the-year foreign exchange reserves were never less than one-quarter
of the annual import bill and were as high as 37 percent of imports in 1964,
the year of the exchange rate reforms (Table 11—6).
During the same period, substantial liberalization of the import regime
took place. The average tariff level declined and quantitative restrictions were
much less important than before 1963. The demand for imports was held in
234
AN OVERVIEW
TABLE 11-6
Capital Account Transactions and Foreign Exchange Holdings,
1953 to 1972
Ratio of
Gold and Foreign
Net Capital
.
Official
Year
Net Loan
Capital
Grant Aid
($ million) ($ million)
Net
Capital
Imports
($ million)
Imports
to Merchandise
Exports
Exchange Holdingsb
.
($ million)
1953
193
112
305
7.62
109
1954
1955
139
28
167
6.96
108
240
—3
237
13.17
298
14
312
373
12.48
96
99
116
146
1956
1957
1958
1959
1960
355
319
229
256
207
200
208
1964
1965
1966
1967
1968
1969
1970
141
—26
1971
1972
64
1961
1962
1963
18
—1
312
212
255
19
226
—16
—104
184
—7
—17
135
9
122
218
299
422
135
121
104
85
51
631
582
662
530
204
—
—
29
26
30
42
147
157
51
207
73
169
131
43
26
54
115
134
.97
136
37
.77
340
334
543
735
667
726
1.36
146
245
36
1.00
356
39
1.10
391
30
1.12
553
34
610
568
740
34
581
SouacE: Bank of Korea, Economic
various issues prior to 1973.
19.58
18.35
10.60
7.28
5.51
3.35
2.34
Percent
of
Imports
.76
.64
.35
35
Yea
1955
1956
1957
1958
1959
19601
1961
1962
1963
1964.
1965
1967k
1968J.
1970
27
33
Statistics Yearbook, 1973, pp. 222—223 and
index,
columj
a. Loan capital, both private and government, short term and long term, net of
amortization payments.
b. Includes reserve position in IMF and special drawing rights.
check, mainly by exchange rate policy. The large devaluation of 1964 raised
the effective exchange rate on imports from 207.39 won to the dollar on a
purchasing-power-parity basis in 1963 to 283.79 won to the dollar in 1965
(Table 11—7). From 1965 to 1970, although the average effective rate declined, it remained higher than at any time during the earlier period 1955 to
1963—except for 1961 when there was a sharp devaluation.
Imports into South Korea are very sensitive to exchange rate changes.
This
In
and
4
dat
rate
imporl
was
capitaç
235
DEMAND FOR FOREIGN EXCHANGE
TABLE 11—7
Effective Exchange Rate on Imports on Purchasing-Power-Parity
Basis, and Growth of Imports, 1955 to 1970
eign
lings'
of
iports
29
26
30
42
54
(won/dollar)
(won/dollar)
1955
1956
1957
1958
1959
1960
99.71
132.10
118.12
121.80
119.73
135.37
244.79
226.57
189.32
232.22
265.40
256.34
243.12
233.30
234.53
11.67
10.43
12.74
28.42
65.84
64.86
34.42
28.39
18.07
23.35
28.39
23.40
23.48
22.62
20.60
20.29
1962
1963
1964
1965
1966
1967
1968
1969
1970
26
37
35
36
39
34
34
27
Tariffs and
Tariff
Equivalents
Year
1961
SI
73
43
240.2[
Effective
Exchange Rate
on
(won/dollar)
111.38
142.53
130.86
150.22
185.57
200.23
279.21
254.96
207.39
255.57
283.79
279.74
266.60
255.92
255.13
260.50
Imports
($ million)
327
380
390
344
273
305
283
390
497
365
420
680
909
1,322
1,650
1,804
Growth
Rate of
Imports
(percent)
—
16.2
2.6
—11.8
—20.6
11.7
—7.2
37.8
27.4
—26.6
15.1
61.9
33.7
45.4
24.8
9.3
SOURCE: Tables 8—bC and 8—biB.
a. The first three columns are won/dollar rates deflated by a purchasing-power-parity
index, and represent averages over the year. The third column is the sum of the first two
33
3
Official
Exchange
Ratea
PurchasingPower-Parity
and
columns.
of
This is vividly illustrated by even a cursory look at the data in Table 1 1—7.
In 1958 and 1959, imports dropped sharply, even though GNP grew at 5.5
and 4.4 percent in those years. In 1958, there was no devaluation of the offiaised
on a
1965
de-
55 to
nges.
cial exchange rate, but a foreign exchange tax was instituted and a price
stabilization program implemented, both of which raised the effective exchange
rate on imports (on a purchasing-power-parity basis) about 15 percent. The
imposition of the foreign exchange tax was equivalent to a devaluation for
imports. Imports fell by 12 percent in 1958. Part of the reduction in imports
was due to a fall in grain imports as domestic grain production increased
sharply, but imports of consumer goods fell by 25 percent and imports of
capital and intermediate goods were also reduced. In 1959, foreign exchange
236
AN OVERVIEW
tax receipts quadrupled and the effective exchange rate was increased by
another 23 percent. Imports fell by 21 percent. Although grain imports con-
tinued to fall, consumption goods imports fell by almost 50 percent and intermediate goods by almost 10 percent.15
In -January and February of 1961 a large devaluation reduced the value
of the won from 65 to 130 won to the dollar. Grain imports increased by 50
percent, but imports of consumer and intermediate goods imports were sharply
reduced. The net result was a 7 percent decline in total imports even though
GNP grew 4.2 percent.
In 1964, there was a very sharp reduction in imports of 27 percent. The
official exchange rate was devalued almost 50 percent. The growth of GNP
was 8.3 percent, but there were very substantial reductions in nearly all categories of imports, including a 50 percent decrease in consumer goods imports.
The evidence of the sensitivity of imports to exchange rates is corroborated by the regression analysis described in Chapter 8. The regressions which
1
I
C
8
dealt with imports of consumption goods, capital goods, and intermediate
goods, were stable regardless of the time period used. Linear regressions provided very good fits. The elasticities of imports with respect to the official
exchange rate (ORD) and the level of tariffs and tariff equivalents on imports
(SUBM) are shown in Table 11—8.
Consumption goods are by far the most elastic with respect to changes
in exchange rates and tariffs. Imports of capital and intermediate goods are
generally less than unit elastic with respect to the exchange rate, but imports
of intermediate goods are fairly sensitive to changes in tariff rates. Since the
81
supply of imports to Korea is probably close to infinitely elastic, it can be
assumed that exchange rate changes have a powerful effect -in reducing the
dollar value of imports.
In the late 1960s, the demand for foreign exchange was augmented by
the need to service foreign debt. Beginning in 1970 attempts were made to
restrict the import of foreign capital. By 1971, debt service payments reached
$326.6 million on debt of maturity greater than one year. But debt service
payments were still only a small fraction of the total use of foreign exchange
c
before 1971.
South Korea succeeded in restraining the demand for foreign exchange
during the period of rapid growth from 1963 to 1972. A less developed econ-
omy, growing at more than 10 percent per annum, can be expected to run
short of foreign exchange because of the rising demands for imports. Although
imports rose rapidly through much of this period, import growth would have
been much greater had it not been for frequent devaluations and maintenance
of the purchasing-power-parity effective exchange rate for imports at a constant level. Furthermore, the stable exchange rate helped stimulate export
receipts, which were used to finance an increasingly large share of the total
import bill.
Cii.
-
E
tui1
St1
237
ECONOMIC EFFICIENCY
TABLE 11—8
Elasticity of Imports, Various Periods
by
on-
ter-
ply
Import
Variablea
(dependent
variable)
ugh
Importsof
due
50
The
NP
ate)rtS.
,bo-
hich
consumption
goods (MC)
Importsof
capital
goods (MK)
hate
ida!
Imports of
intermediate
'orts
goods
pro-
ages
are
orts
t
be
(MI)
Commercial
Policy
Variable'
(explanatory
variable)
.
Time Period
1955—59
1960—64
1965—70
1955—70
Effectiveexchange rate
on imports
—2.09
—5.48
—1.43
—2.11
Officialexchange rate
—0.86
—0.99
—0.21
—0.36
'Official
—0.57
—0.80
—0.33
—p.47
Irate (ORD);
and
—0.97
—1.36
—0.57
—0.79
(ORD & SUJ3M)
(ORD)
(tariff equiv(SUBM)
•
NOTE: Elasticities based on regression equations (8—24), (8—25), and
Chapter 8, and computed at the means of the variables.
a. In constant 1965 prices.
b. Purchasing-power-parity basis.
(8—26) in
the
I by
to
:hed
vice
inge
inge
:onrun
ugh
mve
snce
con:port
total
Although South Korean economic policies favored high effective ex-
change rates, especially for exports, these policies caused some loss in government revenues and savings. As our analysis in Chapter 9 indicated, less subsidization of exports and higher taxes on imports could have generated somewhat more growth. Nevertheless, the Korean performance was unusually good
compared with the records of other less developed countries.
ECONOMIC EFFICIENCY
There is no conclusive way to determine whether the Korean economy has
operated efficiently. Because the various empirical methods used in the literature all have their faults, caution is necessary in discussing measures of efficiency. It is clear, however, that in Korea inefficiency has not been sufficient to
stifle very rapid growth over the decade beginning in 1963. Furthermore, most
•
AN OVERVIEW
238
of the conventional measures analyzed in Chapter 10 suggest a low level of
inefficiency.
Prior to the 1964 exchange rate unification and liberalizing reforms, the
system of exchange rates and trade policy probably did foster inefficiency.
Quantitative restrictions were very important and the exchange rates were
various and widely divergent.
Since 1964, however, the government has followed different policies. Although liberalizing trends have waxed and waned, the fluctuations have been
minor, never approaching the chaos of the late 1950s.
In Chapter 10, we analyzed the restrictiveness of the trade policy and
exchange rate regime in 1968. We saw that in Korea the average level of
nominal protection is low. For manufacturing, the level of nominal protection estimated from information on comparative international and domestic
prices was about 10.7 percent in 1968 and is probably much lower today be-
C
ti
U
T
al
a
th
1!
0
cause average tariff levels have steadily declined. Quantitative restrictions are
not an important cause of large differences between international and domestic
m
quantitative restrictions in 1968 accounted for only 11 percent of total domes-
tf
prices. The 77 commodity groups receiving significant protection through
tic sales.
Unlike many other countries, Korea does not maintain large differences
in nominal protection between industry and agriculture. Average nominal
protection was 16.6
for agriculture and 10.7 percent for manufacturing. General variability of protection among sectors is quite low. When the
Korean economy is measured in constant international prices rather than
constant domestic prices, the total and sectoral rates of growth do not differ
significantly. Emphasis on export promotion has led to rapid growth in the
most labor-intensive sectors.
ai
m
e,
fr
It
it
The observations made in Chapter 10 suggest an efficient pattern of
growth. Such inefficiencies that do arise stem from the protection of agriculture and import-competing manufactures. The effective subsidy in 1968 to
agriculture was 21.3 percent (Corden definition) and to manufacturing —4.7
percent. Effective protection is also much higher for import-competing industries than for export industries and for domestic sales than for export sales in
industries that sell in both export and domestic markets,
Policies that affect the incentive to import foreign capital can influence
efficiency just as much as policies that affect exports and import substitutes.
In Korea, the incentive to import short-term foreign capital during the 1960s
was excessive. Domestic inflation, high real and nominal domestic interest
rates, and a failure to devalue smoothly and adequately all contributed to an
exaggerated demand for foreign loan capital.
Policies governing credit, interest rates, pricing, the subsidization and
management of government enterprises, and taxation also bear on efficiency.'6
a
-
.
of
W
gr
rn
re:
.-
A
ROLE OF THE LIBERALIZATION EPISODES
0
239
Only partial allowance was made for these policies in our estimates of effective subsidy. It is clear, however, when they are taken into account, that both
the total and the variability of effective subsidies increase.
:y.
re
en
rid
f
ire
tic
h
ROLE OF THE LIBERALIZATION EPISODES
The major liberalization efforts in Korea took place in 1964 and 1965. Earlier
attempts in 1961 and 1962 that had failed of full implementation prompted
a return to the multiple exchange rate system in 1963.
There is no clear correlation between the liberalization of 1964—65 and
the start of rapid growth. In fact, mining and manufacturing output, which
had grown 14.1 percent in 1962 (constant 1970 prices), and 15.7 percent in
1963, registered a gain of only 6.9 percent in the first year of liberalization.
Only a poor harvest made 1962 a bad year and only an excellent harvest
made 1964 a good one (Table 2—4). The satisfactory performance of 1962
and 1963 was largely the result of expansionary fiscal policies whereas industrial performance suffered in 1964, despite liberalization, because fiscal and
monetary stabilization were rigidly enforced.
es
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nd
Nor was the devaluation of 1964 associated with a sudden upsurge of
exports. Having touched bottom in 1958, exports grew without interruption
from 1959 on.
The main argument in defense of liberalization is that it laid the basis
for a decade of sustained growth, whereas fiscal and monetary policies were
responsible for brief deviations from a propensity for substantial real growth.
It might also be argued that liberalization itself was less important as a direct
influence on the economy than it was as the harbinger of new approach to
exchange rates and trade policy that favored rapid growth.
Since liberalization, the effective exchange rates on exports and imports
have remained high (somewhat higher for exports than for imports—see Table
5—10) while foreign exchange has never become a severe constraint on growth.
The devaluation of 1964 was followed by many others over the next eight or
nine years, both floating devaluations and discontinuous changes in the value
of the won. Exchange rates had great effect on export performance, particularly after the reforms of 1964, and as Chapter 6 demonstrates, the growth of
exports has been the dominant factor in the growth of the economy as a whole.
We conclude, therefore, that the unification of the exchange rates and the
stability of the effective exchange rate were powerful stimuli to subsequent
growth.
By contrast, the interest rate reform of September 1965 was probably of
more intrinsic importance in its effect on the rate of growth. The interest rate
reform greatly encouraged household savings which having been negative in
240
AN OVERVIEW
1964 became about one-quarter of total domestic savings in 1969. Business
f
savings, which had been nearly stagnant from 1962 to 1964, more than
doubled between 1964 and 1970. Even more important than this boost for
savings was the effect of the interest rate reform on incentives to hold assets
in different forms. Commercial bank time deposits became the more favored
way to hold savings; the increase in commercial bank deposits far exceeded
the increase in total savings.17 Most loanable funds were controlled by the
commercial banks. Though some of their lending was done at subsidized
interest rates, thus encouraging inefficient use of resources, the commercial
banks could lend in much greater volume than the unorganized money markets
and operate with much lower overhead. The cost to large borrowers was also
much lower if they borrowed from the commercial banks instead of from a
myriad of small operators in the unorganized money market.
The reforms of August 1972 took a different tack. After 1965, no serious
effort had been made to reduce the rate of inflation. Rather, high nominal
interest rates and frequent devaluations were supposed to compensate for rapid
inflation. With the reforms of 1972, low nominal interest rates, stability of the
exchange rate, and less rapid price inflation were to be the basic elements of
policy. According to McKinnon (1973), there are important flaws in this new
policy. A major factor in increasing the money supply in Korea is the discount
of export bills at very low rates of discount and low rates of interest on the
bills themselves to exporters. The low rate of interest on the bills increases
exporters' demand for this form of credit and the even lower discount rate
encourages commercial banks to discount the bills at the Bank of Korea, thus
increasing commercial bank reserves. In fact, in the first six months of 1973,
the discount of export bills exceeded the increase in commercial bank reserves,
the other sources of reserve creation having undergone a net decline. Because
of the discount of export bills, which has become the main source of reserve
creation, the Bank of Korea has lost effective control of the money supply.
Under such conditions, it is unlikely that inflation can be held within reasonable bounds. Added to the inflationary difficulties is the rapid increase in
prices of petroleum products and grains, both of which Korea imports in large
amounts. The success of the new policies in the long run, however, will depend
on finding ways to bring the money supply back under control.
CONCLUSIONS
The Korean experience over the decade since 1963, remarkable as it seems to
have been, does not necessarily provide a model for other less developed
countries. There have been a number of special factors operating which are
not likely to be replicated in other countries. It was the confluence of those
d
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thi
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iflf3$
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13
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of
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•
.
ed
ire
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241
factors, no one of them separately, that led to successful growth. First, abundant foreign assistance, particularly during reconstruction after the Korean
War, helped build the infrastructural base for subsequent growth, although the
periods of high levels of foreign aid are not coterminous with the periods of
most rapid growth. Only a few other countries, having special relationships
with the United States because of U.S. foreign policy objectives, received as
much per capita foreign aid.
Second, Korea was able to maintain high and growing levels of government savings. Rates of taxation and public enterprise profits rose sharply while
the growth of current expenditures remained moderate. Probably such a performance is only possible in countries where political leaders are powerful and
secure. In many less developed countries political power is fragmented, the
political process is highly competitive, and ethnic and regional differences are
acute. Policy-makers in such circumstances are unlikely to be able to control
revenues and expenditures to the necessary degree. To maintain themselves
in power, they must use government expenditures as a means of gaining the
support of particular interest groups. Public enterprises are rarely profitable
because staffing them becomes a form of dispensing political patronage and
top management posts are filled according to political criteria. Costs are high
and productivity low. Prices tend to be kept unrealistically low for fear of
injuring powerful interest groups by allowing prices to rise. Higher rates of
taxation yield returns only if they are accompanied by greater expenditures
contrived for the benefit of particular interest groups.
Third, frequent devaluations, either of the discontinuous type or of the
gliding peg variety, are seldom feasible where resistance is intense. Discontinuous devaluations typically raise prices sharply for many imported goods,
particularly for nonluxuries which had not been subject to stringent import
controls. Consumer groups and industrial end-users who would suffer in consequence may resist efforts to devalue. Even gliding devaluations, which raise
prices of imported goods more gradually, are not always popular. When the
Allende regime came to power in Chile, it abolished the gliding exchange rate
and fixed the foreign-exchange value of the domestic currency, partly because
the gliding peg was politically unpopular. Even Korea abandoned the gliding
peg in 1972 because considerable resistance to devaluations had gathered
among a wide variety of industrialists. Many Korean firms had accumulated
large foreign debts and were financially precarious. Continuous devaluations
increased the amount of their dollar-specified liabilities in terms of won. Other
firms producing mainly for the domestic market saw the costs of imported
inputs rising and joined the resistance. Exporters, always favored by subsidies
of various sorts as well as by frequent devaluations, have not organized an
effective counterforce, possibly because they feel they can always count on
enough subsidization to make up for losses caused by a failure to devalue.
242
AN OVERVIEW
Fourth, government policies toward labor in Korea prevented real wages
from rising except in response to labor shortages in the late 1960s. This affected growth in two ways. Profit rates and returns to capital were high, stimulating high levels of investment. Wage disparities did not arise among sectors;
labor -was efficiently allocated among sectors; and there were no large and
growing pools of wasted labor in the form of unemployed workers. On the
contrary, unemployment rates declined throughout much of the 1960s.
The lack of pressure from organized labor in South Korea is partly historical accident. During industrialization under the Japanese, labor organizalions were suppressed and suppression has continued to the present
1n
many other less developed countries, organized labor is powerful and political
regimes are dependent on it for support. The demands of labor cannot be
ignored in such circumstances and it would be foolish of the government to
insist that wages be set by market forces.
Fifth, South Korea underwent a thoroughgoing land reform first under
the U.S. military government and later under an indigenous Korean government. Japanese landowners were expropriated and the subsequent redistribMtion of land was evenhanded. This meant that no large numbers of landless
laborers streamed into the cities in response to slight differences in urban and
rural wage rates. No doubt workers migrated from country to city, but they
did not overburden the system, since there were more jobs available in the
cities than there were migrants to fill them, as the decline in urban unemployment rates reveals. The even distribution of land also meant that the organization of agricultural production could easily be made labor intensive. The
result was an efficient use of resources where land and capital were scarce and
labor superabundant.
A land reform like South Korea's is not easily duplicated in other countries. Large landholdings, which were in the hands of one group of foreigners,
the Japanese, were expropriated initially by another group of foreigners, the
Americans. But when an indigenous government attempts to expropriate land
from major landholders who are politically powerful, the reforms are not
likely to be so sweeping.
Sixth, Korean culture places a very high value on education. Since parents
are willing to spend large amounts of their own funds for the education of
their children, they support a vigorous system of high-quality private schools
throughout the country. Thus, even though public expenditures on education
in Korea are low by international standards, South Korea's literacy rate is one
of the highest in the world. Korea also has a very high proportion of secondary
school and university graduates. Because this large investment in human capital did not require a commensurate public expenditure, more public resources
could be channeled instead into economic overheads and directly productive
investments.
r
i
r
si
in
g
re
is
ta
m
ti
e
ta
ex
su
b
at
no;
a
Th4
exi
*
CONCLUSIONS
'es
af
243
These special factors are lacking in many less developed countries and the
combination of any number of them is rare indeed. Taiwan is the only less
developed society where strong similarities to Korea are found.
These special factors, however, are not sufficient in themselves to explain
the
za-
In
cal
to
der
rnbu-
the success of the South Korean economy. Economic policies made an important contribution: tax and government expenditure reforms, the interest
rate reforms, the exchange rate reforms, and the general emphasis on export
promotion and reliance on international prices were some of the most critical.
There is some evidence that export promotion was a bit overdone—greater
reliance on tariffs particularly as a source of revenue may have generated
slightly more growth—but the bias toward exports was far preferable to a
strong bias in favor of import substitution. The export bias allowed efficient
industries to establish themselves without being limited in size by the domestic
market. The export bias led to an increasingly open economy and generated a
growing share of the foreign exchange that lessened the economy's dependence
on foreign capital imports. The subsidization of exports led to some inefficient
resource allocation but did not result in the same distortion of incentives which
Lnd
is often the result of import substitution. Quotas on imports or prohibitive
tariffs can distort the structure of product prices much more than the instru-
the
tions and rebates, subsidization of credit, and subsidization of inputs. The
ess
Dy-
zahe
Ind
the
nd
nts
of
ols
ion
)ne
Iry
ptces
.ive
ments typically used to promote exports. Exports are subsidized by tax exemp-
effect of these instruments on costs and prices is limited. For example, income
tax exemptions can be applied only if a firm is profitable and only to the
extent that profits are made. Subsidized electricity and transportation rates
typically affect only a small proportion of costs. In theory a direct export
subsidy could be made to have as large a distorting effect as any tariff or
import quota. In fact, direct subsidies have rarely been used. There has always
been a reluctance to use direct subsidies, partly because they must be appropriated as a specific government expenditure and the effect on the budget is obvi-
ous and direct. A tax exemption, however, does not appear directly in the
budget either as an expenditure or as negative revenue. An import quota has
no obvious impact on the government budget. An import tariff except when
prohibitive makes a positive contribution to revenue.
Unfortunately, South Korea's economic gains have been accompanied by
a great deal of political repression. Labor unions have been very much discouraged, and there exist many cases of employer abuse of unskilled workers,
reminiscent of nineteenth century sweatshops in Western nations. The South
Korean experience does illustrate, however, the effectiveness of price-onented economic policies in initiating and sustaining rapid economic growth.
The poor performance in the area of human rights and in the labor policy is
tempered by a favorable performance in terms of income distribution and the
existence of many benevolently paternalistic employers. The relevance of the
244
AN
Korean experience to other less developed economies, however, is questionable
at best because it was probably the combination of political, historical, and
cultural circumstances found only in South Korea that made these policies
succeed. In other circumstances they might not work.
NOTES
1. See Chenery, Duloy, and Jolly (1973), Chapter 2.
2. Economic Planning Board, Major Economic Indicators, May 1972, pp. 88—89.
Farm wages are reported in terms of a daily wage rate. To get monthly earnings, the
daily wage rate was multiplied by 23.
3. Bank of Korea, Economic Statistics Yearbook, various issues.
4. Average total farm household income is from Ministry of Agriculture and Forestry, Report on the Results of Farm Economy Survey and Production Cost Survey of
Agricultural Products (1972). Average total farm household income is divided by 2.22
workers per household in 1964, 2.05 workers per household in 1968, and 1.98 workers
in 1971. These figures were estimated from the farm labor force estimates in Table 11—2
and the total number of farm households in Bank of Korea, Economic Statistics Yearbook, 1973, p. 104. Manufacturing wages are from p. 254 of the same publication.
5. Brown (1973), p.205.
6. Literacy rate for population aged 13 and over from Economic Planning Board,
"Briefing Materials to the President," June Il, 1973.
7. Ministry of Education, Statistical Yearbook of Education, 1970, pp. 138—139.
8. Major Economic Indicators, 1961—197!, Seoul, Economic Planning Board, May
1972, p. 81.
9. See Cole and Lyman (1971).
10. Bank of Korea, Economic Statistics Yearbook, 1973, pp. 258—259 and 288—289.
11. Bank of Korea, Economic Statistics Yearbook, 1973, pp. 290—291.
12. Economic Planning Board, Major Economic Indicators, 1961—197!, p .33.
13. Ibid., p. 35.
14. Bank of Korea, Economnic Statistics Yearbook, 1973, pp. 288—289.
15. For data on grain imports and the breakdown of imports into consumption
goods, capital goods, and intermediate goods, see Table 8—bC and definitions and sources
in Table 8—8.
16.
.
See Brown (1973) for an analysis of the efficiency aspects of a number of these
4
policies.
17. Commercial bank deposits increased from 28 billion won in 1964 to 636 bil-
lion won in 1971; time and savings deposits increased from 9 to 467 billion won over the
same period. See Major Economic Indicators, 1961—1971, p. 35.
I.
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